Designing a Cap-and-Trade Program For the Midwest

The Greenhouse Gas Accord announced by ten Midwestern governors in November 2007 involves nearly one fourth of U.S. greenhouse gas emissions in a regional agreement to improve energy security and design a greenhouse gas (GHG) reduction program. Among the strategies described in this accord is the use of a market-based, multi-sector cap-and-trade mechanism to reduce emissions. As the Midwest explores options for such a program, it will face a variety of design choices regarding program goals, costs, and equity. This paper is intended to guide many of these choices by describing some of the options available.

This paper begins with a general overview of the basic building blocks of cap and trade, followed by a discussion of the potential scope of coverage of a program, including what entities might be regulated and which emissions. The paper then focuses on how to set the initial emissions cap and the trajectory for emissions reductions under a potential program. An examination of the options for distributing allowances, or permits to emit, follows. The document then explores how a program might grant early reduction credits, offer project-based offset credits, and provide other potential cost-containment measures. The potential for linking with other similar programs is then briefly discussed.